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How Bad Are Big Oil’s Earnings?

BP’s first quarter earnings plunged by two-thirds, and its debt levels rose to a record high.

The global pandemic and the collapse of oil prices will hit U.S. shale drillers first and foremost as highly-indebted companies have little flexibility during a downturn. They may also be some of the first in line to shut in production. Drowning in debt, smaller shale E&Ps will not survive long with prices in the dumps and the economy on hold.

The oil majors should fare better, but they will still be severely damaged by the unfolding downturn. Buffeted by sharply lower crude oil prices, the majors are also walloped by the collapse of refined product demand. During previous down periods, particularly from supply-driven price declines, refining acts as a buffer for integrated companies. Lower oil prices are offset by higher revenues from selling refined products.

That is not the case this time around. The world is awash in oil, but also in gasoline and jet fuel. Refineries have sharply cut back on processing because storage for all types of petroleum products is filling up.

BP earned $791 million in the first quarter, down from $2.4 billion from the same quarter a year earlier. “The environment is brutal,” BP CEO Bernard Looney told the Financial Times on Tuesday. Looney said that the company would not slash payroll right now, but that there would be job cuts “towards the end of this year.”

BP decided to protect its dividend, even in the face of rising debt. Gearing, a measure of debt in relation to equity, rose sharply to 36 percent, up from 31 percent in the fourth quarter. Net debt jumped by $6 billion.

Last week, Norway’s Equinor slashed its dividend. In order to maintain shareholder payouts, BP and other oil majors will be forced to take on even more debt.

The problem for BP (and every other oil company) is that the first quarter only captured a few weeks of the oil market meltdown. The second quarter will be dramatically worse. “Demand in the second quarter, we think, will be down around 16 million barrels per day worldwide this year. And that’s about five times the previous demand destruction which we saw in the global financial crisis in 2008 to 2009,” Looney said on CNBC.

Meanwhile, Looney said that BP would stick with its plans of transitioning into a net-zero carbon emissions company by 2050, noting that if anything, the pandemic will only “add to the challenge for oil outlooks in the future.”

Indeed, the pandemic will leave lasting scars for the oil industry. Costs for EVs are coming down, even if the switchover has a long way to go. Oil demand may take a long time to recover to “normal,” and some argue that demand may never fully recover.

For power generation, the dynamic is even darker for fossil fuels. A report from Bloomberg New Energy Finance finds that solar PV and onshore wind are now the cheapest forms of electricity on two-thirds of the planet, and cheapest in markets that comprise 71 percent of global GDP. Batteries are also the cheapest form of “peaking” electricity in Japan, China and Europe. Solar is even starting to challenge existing fossil fuel plants.

The collapse of oil prices and aggressive lobbying from the oil industry has resulted in a tidal wave of various deregulatory and bailout efforts from the U.S. government. The Trump administration is still trying to come up with ways to bailout oil companies, which apparently even go as far as potentially taking equity stakes in companies themselves.

For an industry facing structural problems, that may be throwing good money after bad. The oil industry “does not only face a short-term cash crunch. It faces an impending train wreck,” Tom Sanzillo of the Institute for Energy Economics and Financial Analysis (IEEFA) wrote in a commentary. He noted that much of the oil and gas sector faced financial distress even before the pandemic. “For the taxpayer, money to the oil and gas sector is a waste.”

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